JacobPassy

The U.S. added 209,000 jobs in July, but wage growth was sluggish. Why has executive pay soared when the average American worker has seen wages stagnate in recent years?

After examining different theories behind executive compensation, a group of researchers concluded that there isn’t one prevailing explanation. A recent working paper distributed by the National Bureau of Economic Research, a Cambridge, Mass.-based research group, instead found it’s more likely due to a complex confluence of legislation introduced in the 1990s, pressure from shareholders and investors to land the most sought-after candidate and — yes — good old-fashioned negotiation.

It’s an increasingly vexing issue for the average employee. In 2016, the average CEO of an S&P 500 company got an 8.5% bump in pay, according to a joint report from the Associated Press and executive pay data firm Equilar — and median compensation for these executives was $11.5 million. Not accounting for inflation, CEO pay spiked 19.6%, helped by a buoyant stock market. Comparatively, the average worker in America only saw a 3% raise, despite the fact that CEOs are paid 335 times more than them.

Of course, many executives earn their million-dollar salaries by returning value to shareholders, hiring new employees, spotting trends before their competitors and continuing to grow the business. What’s more, they often have extremely high goals that are set by the company’s board of directors. “The skills of executives may be particularly scarce, and CEOs have a much larger impact on firm value than rank-and-file employees, which can fundamentally change the nature of the optimal contract,” the report found.

Here are three theories behind rising executive pay:

Boards are under pressure to find a big name

A company’s executive board and compensation committee are concerned about how much an executive benefits the company’s shareholders when deciding how to pay them. In determining compensation, they take into account the market rate for executives and the need for incentives. Shareholder values seems to guide how Tesla Motors
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CEO Elon Musk is paid — he must not only oversee the company meeting various stock targets but also improve its product offerings to be able to access his stock options.

Executives are typically very skilled negotiators

Executives, like most employees, fight for the most favorable terms. But companies need these executives more than they need the companies and they have likely had plenty of experience negotiating deals, so negotiating a pay check should seem like small potatoes. They also know how to seek perks like golden parachutes and corporate jets or huge benefits for completing a successful merger. Some CEOs may even push for financial rewards in areas where they excel, the researchers found. Take former Yahoo
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CEO Marissa Mayer: She reportedly made $186 million through the company’s sale to Verizon Communications
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.

Regulations and taxation influence compensation

Legislation, taxation and regulation have all helped fuel the rise in executive pay. The report pointed to the Clinton administration’s 1993 decision to limit the tax deductibility of pay for top executives at public firms to $1 million annually per executive. While this obviously caused salaries around the $1 million-range to grow more slowly, high-ranking employees turned to other forms of compensation such as stock options and other bonuses which are — to be fair — performance based. Earlier this year, Snap
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realized a massive amount of stock-based compensation to employees whose options vested at IPO time.

In fact, executive pay has risen across all firm types since the 1970s in the U.S., with the most pronounced growth occurring throughout between the early 1990s and the early 2000s when the country experienced significant economic growth, the report noted. But CEOs earning more money on average is not actually a given. During World War II, executive pay dropped and then remained steady until the mid-1970s and also stagnated during the Great Recession, but a recent Wall Street Journal analysis found that, in 2016, CEO pay hit a post-recession high.

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